We believe that the US Dollar is in the early stages of a MAJOR BULL MARKET…we look for it to rally like it did in the early 1980’s (it doubled) or the late 1990’s (it gained 50%) as money “Comes to America” seeking safety and opportunity. We think that a Strong Dollar will have a profound effect on all other markets. The following charts will provide a longer term perspective on the Dollar…and perhaps some clues as to what may happen in different makets over the next couple of years. Our short term trading comments follow the charts.

A Forty Year History of the US Dollar in One Paragraph:

The US Dollar fell to All Time Lows while Jimmy Carter was President (they “talked” the Dollar down) as inflation was going through the roof. Massive joint intervention by the US, Japan and Germany in November 1978 defined the low and then Volker’s interest rate policy changed everything…the real yield on 10 year Treasuries rose to more than 8%, Ronald Reagan became President and declared it was, “Morning again in America.” The Dollar doubled during Reagan’s first term…then fell in half during his second term (the Plaza Accord in Sept 1985 to up-value the Yen accelerated the US Dollar decline.) The Dollar moved sideways to lower during George Bush’s Presidency and during Bill Clinton’s first term…but had another big rally during Clinton’s 2nd term (with red-hot tech stocks drawing capital from around the world.)The Dollar topped out early in George W. Bush’s first term and fell to new All Time Lows in 2008…it rallied ~25% from those lows during the 2008 – 09 financial crisis (the Dollar was a safe haven) and then made an important “higher low” in May 2011…a “Key Turn Date”…a date we think marks the beginning of the current multi-year US Dollar Bull Market…and a date we think marks the end of the 10 year Commodity Bull Market (more on that below.)

The Dollar and the Stock Market:

We think it’s very interesting that during the Dollar’s big 1995 to 2001 rally that the S+P 500 Index tripled in value (the Nasdaq was up twice as much.) Fifteen years ago we wrote about the “Virtuous Circle” created by capital flowing to America…boosting the value of the Dollar and the stock market…with the momentum of those rising markets in turn drawing more and more capital to America. We think it’s possible that we will see another such “Virtuous Circle” in the years ahead.

Gold, Commodities, Commodity Currencies and the Dollar:

We think that the Bull Market in Gold, Commodities and Commodity Currencies that began in 2001 – 02 ended in 2011…that it was actually the “flip side” of the 10 year Bear Market in the US Dollar…and now that the US Dollar is in a rally mode lower prices lie ahead for these markets:

The May 2011 Key Turn Date:

The Dollar hit an All Time Low in March 2008…it began a sharp rally in July 2008 as the financial crisis hit and commodities crashed. The Dollar made a “Higher Low” in May 2011…a date we called a “Key Turn Date” because a number of markets made important turns on that date. Since May 2011 Gold is down ~33%, Silver down ~60%, Copper down ~30%, WTI Crude down ~20%, CAD down ~14%, Euro down ~12%, US Dollar up ~13%, S+P up ~82%.

The May 2011 Key Turn Date is important because it illustrates our point that the US Dollar is the “flip side” of a number of markets…that “turns” in the US Dollar have an effect on other markets….and that a sustained strong Dollar has profound effects on other markets. For instance, a weak Dollar encourages borrowing in Dollars and investments in markets “other than” Dollars. If the Dollar is in a sustained rally the pressure builds to unwind those loans and investments.

It’s interesting that US Treasuries also had a Key Turn Date in May 2011 and began a one year rally to lifetime best prices (lowest yields.)

Short term trading comments:

We are writing these comments on the 2014 Labor Day weekend. As summer ends there are several market extremes which may set up near-term reversals:

     1) The US Dollar Index is at one year highs, the Euro is at one year lows…a huge short position has been built in the Euro over the past few months,

     2) The S+P and the Toronto Index are at All Time Highs, with the S+P registering a RARE Monthly Key Reversal Up in August…the 5th such reversal since the 2009 lows…all reversals have been followed by higher prices,

     3) The Bull Market in Bonds has taken Euro Sov Bonds to historical (100+ years!) low yields with most countries at substantial yield discounts to Treasuries (does it really make sense that France can borrow 10 year money at 1.25% while America pays 2.35%???)

     4) Volatility is at very low levels across asset classes.

The Market is expecting BIG things from the ECB on September 4…if they “fail to deliver” the Euro (and other currencies) may rally against the Dollar…the stock market and the bond market (especially Euro Sov bonds!) may take a tumble…September/October is historically a time of weakness…

We note that Martin Armstrong’s Economic Confidence Model is forecasting a “turn” the first week of September.

We had thought that the late July break in the stock market was the beginning of a correction…not a “Buy the Dip” opportunity. We were wrong (although we did collect the equivalent of 600 Dow points being short the break.) We remain suspicious of the current phase of the rally…expecting a break…but also respecting the strong bullish momentum. We’ve taken short term profits on our long Dollar position…we are leery of a Euro re-bound…but we’re looking to re-enter long dollar positions. We continue to trade the AUD and CAD from the short side.

We think that the major “tailwind” supporting the Dollar is divergent Central Bank policies…with the Fed tightening relative to the other Central Banks. We think this tailwind will be sustained if not intensified in the months and quarters ahead. Rising geo-political stress gives the Dollar a “Flight to Safety” bid…but we have no ability to forecast the intensity of geo-political stress…other than to note that there appears to be plenty of opportunity for it to rise. We have to wonder, for instance, if Kiev “cuts a deal” with Russia to reduce hostilities and boost the economy if that wouldn’t cause Euro shorts to scramble…looking further down the road we have to wonder if two years from now America elects a new President who is as different from Obama as Reagan was from Carter if that won’t give the Dollar a boost…